Energy Focus Inc (EFOI) 2010 Q2 法說會逐字稿

Good day and welcome to the Energy Focus second quarter 2010 earnings call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brian Tanous. Please go ahead, sir.

Thank you, Lena. I would like to welcome everyone to Energy Focus's second-quarter earnings conference call. On this call the Company's Chief Executive Officer Joe Kaveski will give a business update on the combined SRC and Energy Focus businesses and provide an outlook for the third quarter as well as for the full fiscal year 2010. The Company's Chief Financial Officer Nick Berchtold will then address the Company's second quarter financial results. We also have President John Davenport on the call with us this afternoon.

Following the prepared remarks, we will open it up for questions for the remainder of this call. Before we get started, I'm going to read a disclaimer about forward-looking statements.

This conference may contain in addition to historical information forward-looking statements within the meaning of the federal securities laws regarding Energy Focus. Forward-looking statements include statements about plans, objectives, goals, strategies, future events and performance and underlying assumptions and other statements that are different than historical facts.

These forward-looking statements are based on current management expectations and are subject to risks and uncertainties that may result in expectations not being realized and may cause actual outcomes to differ materially from the expectations reflected in these forward-looking statements. Potential risks and uncertainties include change in demand for the Company's products, the impact of competition and government regulations and other risks contained in the statements filed from time to time with the SEC.

All such forward-looking statements whether written or oral made on behalf of the Company are expressly qualified by these cautionary statements and such forward-looking statements are subject to risks and uncertainties and we caution you not to place undue reliance on these. With that, I would like to turn the call over to to Mr. Joe Kaveski.

Thank you, Brian, and thanks to everyone for participating in the new Energy Focus's 2010 second-quarter earnings call. It's a great day as Energy Focus's sales are nearly triple that of last year and the Company is in full compliance with NASDAQ's listing requirements.

Energy Focus is in a significantly better place and with a brighter future than where it has been over the last several years. The evidence of this is the continued positive momentum in our financial results. So now I would like to share with you some brief comments on our exciting second-quarter results and then provide you with some insight into our 2010 anticipated financial performance.

So to begin, our second-quarter results were by far the best quarter the Company has achieved in a decade. We generated nearly $9 million in sales which is nearly three times the net sales from continuing operations during the second quarter last year. Our new SRC solutions business unit is fully integrated into our operations, performing well and represents more than half of our total sales.

In spite of slower international product sales, our overall product sales continue to improve. This is primarily driven by increased sales to the US Navy, increased pool market sales and to lighting retrofit companies serving the existing building market.

I'm also delighted to report that our net cash usage from operations was way, way down as we used less than $28,000 as compared to the $763,000 net cash usage from operations in the second quarter last year. We're clearly on our way to achieve our forecast to generate cash from operations in 2010.

The Company's overall gross profit margins continue to improve as our second-quarter margins increased nearly 1% as compared to the first quarter of 2010. We expect this trend to continue as we lessen our unabsorbed factory costs, increase the content of EFO products into our solutions agreements and leverage our buying expertise to further reduce our cost of goods sold.

Furthermore, our efforts to reduce operating expenses are clearly paying off big time. In spite of supporting nearly three times the sales of last year, are all-in overhead and including SRC's overhead on a cash basis this year is actually less than last year.

And lastly, in our second quarter, the Company secured $2.5 million in new lighting solutions contracts which we expect to mostly complete in 2010. This brought our solutions contracts to $19 million as of the end of our second quarter.

And today I'm delighted to announce that we have already secured seven new contracts totaling $2.8 million in our third quarter. Included in this work is over $1 million to upgrade the lighting at several locations of a large southeastern healthcare system. The remaining contracts are to upgrade lighting in three elementary school districts and at four fortune 500 industrial facilities.

While the bulk of this work is to be performed in the Southeast, a few of these projects are located in the Northeast and Mexico. In all of these projects our experts at SRC have completed audits of the existing facilities, inventoried their lighting systems, created an improved energy savings design and while now procure materials and be responsible for the installation of the new energy-efficient lighting refurbishments.

So from a financial perspective, Energy Focus is making very good progress and on target to achieve our 2010 forecast. As I stated in our last call, the acquisition of SRC has provided Energy Focus a foundation for sales growth of our existing products and for EFOI's future lighting products that are specifically being designed for existing buildings. So to that end, I would now like to provide you with an update on our research and development efforts.

Yesterday our Company announced another $1 million two-year SBIR contract. This contract is in addition to the two Phase 2 SBIR contracts worth $1.5 million that we secured earlier this year.

What is significant about these SBIRs is that they are in line with our strategy to use government funds to develop key IP which Energy Focus owns and the resulting technology that creates real competitive advantage for our energy-efficient LED lighting products as well as our solar technology. For example, over the last 30 days, we began selling our new hazardous location GlobeLight.

This light was first developed under a DARPA contract for the US Navy and is now being sold into commercial and industrial markets. As I mentioned in our last call, the light targets a $300 million market opportunity and is typically used in refineries, saw mills, grain elevators, coal preparation plants, textile mills, pharmaceutical plants and on oil rigs. By far, our new GlobeLight is the highest performance, lowest cost, longest lasting LED Class 1 DIP2 lamp on the market and it was designed to exceed military specifications.

In the case of our latest SBIR, it involves perfecting our advanced coatings technology that will make our LED general illumination product up to 4% more efficient and can be utilized to increase the efficiency of just about anybody's solar devices including the DARPA [Vhaz] project device which is in the Phase 3 commercialization stage. So now as we look to the future, I would like to provide you some specific guidance.

For our third quarter, the Company expects our sales to exceed $9 million which is three times the $3 million in revenue from continuing operations that we achieved last year in the third quarter and we are reaffirming our total sales for 2010 will exceed $35 million. Furthermore, the Company expects to be net cash flow positive from operations beginning in the third quarter.

We're also reaffirming our guidance that the Company will be overall net cash flow positive from operations in 2010. And the Company will continue to grow organically through the expansion of SRC's market coverage and customer base as well as to increase product sales and possibly through one or more future acquisitions where the acquisitions are accretive.

Clearly, concerns over rising energy prices, the environment, government mandates and the already approved stimulus money increasingly finding its way into the markets and our projects are key elements that will continue to create growing demand for energy-efficient lighting products and our turnkey lighting solutions. And lastly, the Company will also increase its overall gross profit margins by injecting an increasingly higher percentage of EFOI product content into our solutions contracts.

So in conclusion, our plan is clearly working. The Company is on track to almost triple our sales over last year and demand for new sales remains strong. Our cost containment and improvement measures are clearly working and our new product and technology developments are progressing well. So, yes, I do remain bullish about the current and future success of Energy Focus in helping customers solve their lighting and energy needs.

Now before I turn the call over to to Nick Berchtold, our Chief Financial Officer, I would like to mention we will be spending the next month traveling across the country to meet with existing investors, to create interest with new investors and to hopefully attract new analyst coverage.

Please contract Brian Tanous at 310-541-6824. Again that is 310-541-6824 if you would like to schedule some one-on-one time with us at your location. Also, we would like to remind you that if you would like to begin to receive our bimonthly newsletter, then please go to our website at EnergyFocusInc.com and hit the green button to sign up.

So, with that, I would like to turn the call over to to Nick who will provide you further clarity around our financial results. Nick?

Thanks, Joe. I would also like to welcome our participants to today's call. As Joe mentioned, our Company's second-quarter financial results reflect significant improvement over historical levels and show strong and consistent growth on a quarter-over-quarter basis.

Specifically we achieved the following notables during the second quarter. Consolidated revenues from continuing operations of $9 million which is a 169% increase in revenues from comparable 2009 periods. As Joe mentioned, another $2.5 million in new solutions contracts be completed primarily within 2010.

Also and very important is the finalization of our consolidated Fiberstars manufacturing operation within the West Coast, Mexico and California. Additionally, cash usage net of the impact of proceeds from financing activities was effectively cash neutral, minimum $28,000 for the quarter and lastly, the seamless transition from the NASDAQ global market to the NASDAQ capital market which allows the Company to be fully compliant with continued listing requirements.

As mentioned during the previous conference call, I would also like to remind you that the consolidated statements of operations and consolidated statements of cash flows presented in our Form 10-Q have been recast to include only continuing operations as of our June 30, 2010 date. Continuing operations for these statements are defined as Energy Focus, Inc.; Stones River Companies and Crescent Lighting Ltd.

2009 financial results from the Company's discontinued operations are separately reported. Additionally, during the course of our conference call, certain non-GAAP financial measures may be describe which should be considered as an addition to and not in lieu of comparable GAAP financial measurements.

So let me first discuss revenues. Our second-quarter revenues continue to reflect the transformation of our Company both from the combination of realized revenues from our Stones River Companies subsidiary as well as from additional market penetration within our Fiberstars and research-based business units.

2010 second-quarter revenues were $9 million as discussed. But let me break the number down further.

Our Stones River Companies subsidiary contributed $4.9 million or 55% of total revenues while our Fiberstars business unit continued to contribute greatly to the success of the business by generating $3.3 million or 36% of total revenues with our North America product sales business increasing 4% despite continued pressure within the new construction and housing markets. Our research and government sells unit also posted strong performance by generating $790,000 in contract-based revenues during the second quarter.

Now I would like to discuss briefly gross profit from continuing operations. Our second-quarter 2010 gross profit was $1.6 million compared to $812,000 for the second quarter 2009.

During the quarter we continued to recognize benefits from the consolidation of our manufacturing and distribution operations into Mexico as second-quarter non-solutions-based unabsorbed cost of goods sold decreased by 33% from 2009 levels. In looking at gross profit on a sequential 2010 quarter-by-quarter basis, our gross profit margins increased from 16.7 in the first quarter 2010 to 17.5% for the second quarter 2010.

And now I would like to turn briefly to operating expenses. Second-quarter 2010 operating expenses were $3.2 million which represents an 11% increase over second quarter 2009 operating expenses of $2.9 million.

However, after removing non-cash expenses of $597,000 related to equity revaluation and acquisition amortization, second quarter 2010 operating expenses were 10% below prior-year levels. Contributing to this favorable second-quarter result are increased government cost recoveries, reduced overhead expenses and significantly reduced professional services fees and we expect to generate ongoing benefits from these actions into the third and fourth quarters of 2010 and beyond.

Next I would like to review earnings per share. Our second quarter 2010 net loss from continuing operations was $0.08 per share versus $0.16 per share loss for the second quarter 2009. Excluding the previously discussed non-cash expenses, our second quarter 2010 net loss from continuing operations was $0.05 per share.

And now I would like to turn briefly to selected balance sheet items. First, our cash and cash equivalents increased $288,000 from March 31, 2010 levels to reach $2.1 million at June 30, 2010.

Cash on hand at June 30 does include the impact of $316,000 in equity proceeds, however, cash flows usage excluding these financing proceeds was $28,000 compared again to $763,000 of usage during the second quarter of 2009. This represents a 96% improvement over 2009 levels.

And next, accounts receivable increased to $6 million on a consolidated basis at June 30, 2010 versus $2.9 million at December 31, 2009. In spite of this increase in receivables, the Company achieved an improvement in accounts receivable days sales outstanding from 67.2 days at December 31, 2009 down to 60.5 days at June 30, 2010.

Thirdly, inventory within our product-based business decreased to $2.9 million at June 30, 2010 versus $3.8 million at December 31, 2009. As a result, our inventory turns within these businesses improve from 3.3 to 4.5 turns as of June 30, 2010.

And lastly, equity financing did contribute as I mentioned $355,000 in gross equity proceeds during the second quarter of which $316,000 was net of expenses as part of our 2010 purchase share agreement with Lincoln Park Capital. And so in summary, I'd like to reiterate the second quarter results do show proof that the transformation of our Company is well underway and will continue well into the future.

Lastly, I would like to thank you for joining today's conference call and I will now turn the call back over to the operator who will open it up for questions and answers.

(Operator Instructions) Noel Harris.

I'm very pleased with the vast improvement of the Company, number one. So you're doing a very good job.

I have one quick question. I know you have received some orders from the US Navy which looks like a very, very beautiful area for you. But I'm questionable, do we actually have the production capacity to fulfill this size of order and do it in a timely manner?

Well, first off, Noel, thank you very much for your comments there. We do appreciate you recognizing the results have improved.

And the second part is, yes, we absolutely do have the capacity to fulfill orders. We're pretty excited about what the military can represent for us and delivery of products should not be a problem.

As an individual investor, I'm very happy for you.

Thank you very much, Knoll.

Thank you, good job.

Blake Tobias.

Excellent results so far. The question involves the annual meeting on 6/23, the approval of the double the amount of outstanding shares. Wondered if you could share anything in regards to any plan or strategy in releasing those shares out onto the market.

First off, thank you, Blake, for joining us. What we did was to actually increase the number of authorized shares from $30 million to $60 million. That was primarily because basically those existing $30 million of shares had been committed and we were up against the wall there.

So we did ask shareholders to approve and we they did approve them. At this point, no shares have been released. None of those 30 million shares have been released and if for an instance we were to come across perhaps an acquisition that would truly be accretive, then perhaps as part of that deal, it may require some equity upside. But at this particular point in time, none of the shares have been released. So they are just authorized.

So there's no specific plan to -- of course this causes investors concern as you can well imagine.

Sure, sure. Right. Again, no, there is really nothing to report to you, just the additional shares give us the flexibility to grow moving forward as are described in our previous calls. But there are no specific plans at this moment in time.

Robert Littlehale, JPMorgan.

Good afternoon. I was curious on two fronts. One, what you see going on as it relates to stimulus money going into the energy efficient lighting space. That was one question. And then just a little further elaboration as it relates to acquisitions if you were to do some, what direction you may head in.

Sure. Well, first of all, Robert, thank you very much for joining us on the call today. And as it relates to stimulus money, this is an interesting phenomena because it is out there and it is beginning to trickle into our projects. But we really haven't seen that money significantly impact the size of these projects yet.

It does hold the potential of increasing a normal contract by about 20%. But again, in the contracts that we have received to date, there hasn't been a lot of that stimulus money contribution as part of that.

So we're pretty optimistic that that opportunity exists when in fact it does hit. As it relates to our business plan and the potential of a future or one or more acquisitions, rest assured that it would be, number one, only where it is accretive, and number two is within our core competencies.

If we were to acquire another company for instance, it would probably be in line with the acquisition that we completed December 31, 2009, that being the Stones River Companies, where for instance there was a significant backlog of work, a significant pipeline and it would be in a geography for instance where Stones River Companies for instance would have trouble servicing or selling into.

So, for instance, Stones River Companies is based out of Nashville, so it could be perhaps the Northeast would be a large jump in geography or the West. So, again, it is only where -- to basically expand our coverage. It might allow us to quickly get new customers and it would clearly be strategic and accretive for the business.

Did your headcount go up at all in the second quarter?

No, it did not.

Thank you, Joe.

(Operator Instructions) Joe Gilmetti.

Congratulations on a great quarter. I like what I hear.

Thank you, Joe.

Okay. Yesterday morning I was watching CNBC and on the tickertape that goes down on the bottom of the screen, they showed that Cree have -- exceeding the profit estimates significantly and they quoted that from -- the result of that from a surging demand for efficient LED lighting. Then the stock went down $9.00.

The ticker also continued, stating that Cree sees weakness in the next quarter. And you certainly don't sound you like you see any weakness. But I'm just wondering, can you comment on where there may be some weakness in the market somewhere in the next quarter?

Well, I don't know if we exactly match up with Cree. I mean, in terms of the public sector which we're serving right now with our turnkey solutions, this market has never been better. There is an enabling legislation in all but three states that effectively promote public sector agencies, cities, universities, 501(c) hospitals, GSA public, federal government to actually use this procurement vehicle to upgrade their building technologies.

And the fact of the matter is, we believe that their traditional ability to get building improvements is pretty much gone. They're not getting any more money from the tax base and of course their capital budgets are all but tried out.

So this ability to utilize this legislation that we benefit from is a huge driver and so that is really why public sector is absolutely going great guns. And then when you add the thought of additional stimulus money to make these projects bigger, it is a real driver for them.

So I do not see weakness in the same way that a Cree would see the weakness from an LED perspective. And what we do see in the marketplace is that more and more of our customers are wanting to go LED. It's just unfortunately the price point, the cost per lumen of LED technology is a little bit high at this moment in time for general illumination application.

That price is crashing quickly and it won't be long before the price per lumen is comparable with that of linear fluorescent, incandescent or halogen AR that will make it a viable opportunity or a viable alternative within those spaces. So we feel really good about our market and certainly don't share that same view that Cree does or see it.

Well spoken, thank you very much, Joe.

John Klock.

I had two questions actually. I'm a new investor in your Company, a small investor, but I work part-time for an organization in Ohio called Green Energy Ohio. And of course we are promoting renewable and sustainable energy. In your presentation you mentioned something about solar and I was wondering if you could elaborate on that as to what your involvement in solar is.

Sure. I'm going to ask John to basically maybe offer a little more clarity after I kind of introduce this. But from a solar perspective, we are part of a consortium. It is a DARPA, US Government Defense Advance Research Project Agency project which is designed to create the next generation solar technology.

The technology by design is to be more than 40% system conversion efficient. It is called VHESC, very high efficiency solar cell, and it is based upon the concept of optical splitting. Forgive me, I'm not the scientist that John is, but the layman's way I would explain is that if you held a prism up to a light, you would see that the light -- basically the spectrum is divided into its different colors.

In the optical splitting concept, that is exactly what kind of occurs and then the light -- each color of the light is concentrated and then focusing on a semiconductor material that is optimizing for converting that color of light into energy and then of course you sum it up and you get very high efficiency. Traditional silicon-based photo cell technology is not -- silicon is really not optimized for converting all parts of the spectrum into energy.

And so what we do is we actually lead the optics team which includes the advanced coatings that in essence allow that splitting of the light, the focus and the concentration of that color of light into those semiconductor materials that are optimized at converting that portion of the spectrum into energy. Net result is that you can get well beyond what you can with traditional silicon and in fact we've produced a prototype already about one year ago that was around 40% system conversion efficiency.

So it is not just theoretical, it has actually been done. We believe it can go higher than that. Actually it is now in Phase 3 commercialization, meaning that -- the best way I put it is that all of the science and art has more or less been perfected and now it is how do we produce it quickly.

Okay. I know just up your way, I'm in Cincinnati, but just up your way, just upper Sandusky, they just went online with I think it was a 12 or 14 MW solar farm and AEP is the owner of that.

Very good, very good.

I would love to have somebody from your Company come and and talk some time, if that's possible, at one of our meetings.

Absolutely and if you would just send us a note, I would like to recommend that you send that note to our Chief Technology Officer who is Roger Buelow and he can be reached -- or actually, I'll give you an easier one. John is here with us, our President, and you can get him very simply at John@EFOI.com.

Okay, that's easy. Thank you for answering my questions.

(Operator Instructions). Stuart Chase, Eaglebrook School.

I've been involved with trying to be sustainable in our school which is a small school, but it has kids from all over the country and the world. And are you saying that you're increasing the efficiency 40% as compared to something that with our early solar cells were below 20%?

That's correct. That's exactly right. A typical solar installation might be 15% all in and we're talking about more than doubling this thing (multiple speakers)

In the prism covering, does that add to the weight substantially?

We actually have a couple of different approaches to that. In fact, that is going to be published soon. So you've got my e-mail. Just send me a note and as soon as I've got the publication details, I can give you some more.

A lot of the work is restricted. So I can only give you published material at this point. So please send me your e-mail and I will give you more details on it. Very, very exciting stuff.

Are you in any way related following what Spire does in Massachusetts? S-P-I-R-E? They do a lot of solar applications for the space industry.

We're not involved in doing space applications although we have -- some of our partners have done work and have actually -- have materials in orbit on the space station. So EMCOR is one of them that for example is one of our partners, they are making special devices for us as part of this program.

How about energy conversion devices or [Stan Kupchinsky], the greatest capital raiser for nothing that has ever been profitable.

We're trying to steer clear of that. We're looking for solutions that we can take to our customers, same customers as the lighting retrofit customers. They've got roofs that we would love to fill with solar and that is our thinking.

Great. I would love to be in contact on that because we're doing a lot of retrofitting right now.

Just John at EFOI?

That is me.

Thank you very much. You're doing a great job.

We have no further questions in the queue at this time. I would like to turn it back over to Mr. Joe Kaveski for any additional or closing remarks.

Sure, well thank you very much, operator. And again, thank you to everyone that has joined us on the call and a special thanks to our employees who are definitely working hard to be able to deliver on our financial performance.

So, with that, we're really looking forward to our third-quarter earnings call and visiting with you again. Again, if anyone would like to meet with us one-on-one, we would be delighted at that opportunity and suggest you contact Brian Tanous, our Investor Relations. So, thank you again, goodnight, everyone, and have a great evening.

That concludes today's conference. Thank you for your participation.